Both the U.S. Department of Justice and fans of Midwest Airlines agree that a proposal to sell the carrier is worth a long look, although for different reasons.
Earlier this month, agency investigators made a second request for information as they determine whether the deal poses a threat to competition. TPG Capital, a private equity firm, is teaming up with Northwest Airlines to buy the Milwaukee-based carrier for $451 million.
For Milwaukee residents, their concern focuses more on making sure things don't change at the airline known for its customer service, including leather seats and chocolate chip cookies that are baked on board.
While Northwest is now in the middle of an antitrust review that could take longer than first anticipated, it does have one thing that's working in its favor with Milwaukee locals: It's not AirTran Airways.
For more than 18 months, low-cost carrier AirTran pursued a hostile bid for Midwest Air Group Inc., the parent company of Midwest Airlines. AirTran flies out of Milwaukee's General Mitchell International Airport, but is a relatively small player there. It wanted to emerge as a national, low-cost carrier by acquiring Midwest and its 53-city service grid.
But Midwest executives weren't interested in merging with a low-cost carrier. In August, Midwest decided to sell to the team of TPG - the private equity firm - and Northwest Airlines.
If AirTran's interest had never surfaced, and Northwest had been the first airline to line up as a suitor, Northwest might have faced a tougher battle to win over the public, said Scott Walker, the top administrator in Milwaukee County, which runs the airport.
"But because it was viewed as a better alternative to AirTran taking them over outright," he said, Northwest's involvement probably received a more favorable reaction. During the AirTran bid, Midwest executives had said that 700 of 1,865 airline jobs at the airport could potentially be eliminated if AirTran won control.
Last week, Midwest investors approved the sale of the airline to TPG and Northwest. Northwest is investing $213 million for a 47 percent ownership stake in the new, private parent company. The antitrust approval, though, is a separate issue.
In a recent research note, an analyst with Robert W. Baird investments noted that second requests from the Justice Department are uncommon, issued in less than 3 percent of deals that get antitrust scrutiny.
The request "suggests the transaction may not close until next year," wrote Craig Kennison, the Baird airline analyst.
A second request can get "very burdensome and very expensive" for the companies seeking approval, said William D'Amico, an attorney with the Chadbourne & Parke firm in Washington, D.C. "They tend to get into the nuts and bolts of the entire transaction and the marketplace."
Northwest's paperwork on the second request should be done shortly, Ben Hirst, Northwest's senior vice president of corporate affairs and administration, said last week. He said Northwest isn't particularly worried about the antitrust scrutiny.
Northwest says that its investment in Midwest is passive - it won't have any say in management, nor a seat on the board of directors.
In a statement issued in August, Northwest also said it will have the right - but not the obligation - to acquire TPG's interest in Midwest in certain circumstances.
"How passive does Northwest have to be for this to fly?" said Michael Waxman, a law professor and antitrust expert at Marquette University Law School in Milwaukee. If Northwest owns a piece of the new, private Midwest and has a preferred spot in line to eventually buy out TPG, "that's incredible power," Waxman said.
Executives for Midwest emphasized when the TPG-Northwest deal was announced that Midwest and Northwest will still compete against each other.
But how vigorously?
Midwest Airlines said recently that it will drop service between Duluth and Milwaukee on Dec. 1, nine months after entering the market, leaving Northwest as the lone carrier with substantial service to that Minnesota city.
"We are extremely disappointed by Midwest's decision," said Brian Ryks, executive director of the Duluth Airport Authority. He cited statistics showing that Midwest's load factors climbed steadily through this summer before dropping a bit in September.
Midwest cited "inadequate financial returns" when it made the decision, the airport authority said. For Duluth travelers, Midwest was a money saver. "When they came in, we saw fares drop to Midwest destinations immediately," Ryks said. Also, Northwest added a second daily flight from Duluth to its Detroit hub after Midwest came in.
Some are asking whether Duluth's disappointment is a sign of things to come if Midwest is sold to TPG and Northwest.
"Northwest said, apparently with a straight face, that it will have no input into Midwest's operations," commentator Ralph Doty wrote in the Duluth Budgeteer News. "Excuse me, but I don't believe them. And if it turns out that my skepticism is correct, look for other small markets to lose Midwest-TPG's services, leaving NWA as sole vendor."
If Northwest does in fact have the power to buy out TPG at some point, other questions come into play, Waxman said.
TPG, a private equity firm, would be expected to seek an exit strategy at some point, make some money on its investment and move on to other deals. But if Northwest has some sort of preferred spot in line to buy out TPG, "is there a market out there for [TPG's] shares?" he said.
Northwest's 47 percent stake in the Midwest deal is seen as a move to keep a low-cost carrier from establishing a larger foothold in the key Midwest markets that Northwest and its regional affiliate airlines have long dominated.
But during AirTran's quarterly earnings conference call last week, it was clear the thwarted Midwest suitor hasn't taken its eye off the Midwest region.
The low-cost carrier announced Tuesday that it recently secured a deal with ATA Airlines Inc. for slots at LaGuardia Airport in New York, and will soon launch five more round trips from there. The airline also picked up a slot at Washington National Airport in the nation's capital.
By diversifying its network, and providing more access to the nation's largest business centers, "that may help us in the Midwest or wherever we choose," said Robert Fornaro, AirTran's chief operating officer.
Midwest is the largest carrier at Milwaukee's Mitchell Airport. Northwest and AirTran are a distant second and third. In July, for example, Midwest and its affiliate airlines handled 53 percent of passengers at Mitchell, Northwest had 11 percent and AirTran had 6 percent.
The competitive balance in the airline industry varies from airport to airport, and is often determined by whether one or more airlines use it as a hub. At Minneapolis-St. Paul International Airport, 80 percent of passengers are flying Northwest.
When AirTran made its bid for Midwest public in late 2006, "we suggested they should expand in Milwaukee on their own," but not with an acquisition, said Walker, the county administrator. And that's what's happening. AirTran plans to take on four additional gates in a newly remodeled area of the Milwaukee airport.
The county also likes the passenger trends it has seen at Mitchell Airport, fueled in part by more attention from fliers in Chicago and its northern suburbs. In 2005, Amtrak started serving the Milwaukee airport with its Hiawatha line. That service runs seven times a day between Chicago's Union Station and Milwaukee.
John Welbes can be reached at firstname.lastname@example.org or 651-228-2175.